Mikulski v. Centerior Energy Corp.

• Citation: 435 F.3d 666
• Decision Date: 26 January 2006
• Docket Number: No. 03-4486.,03-4486.
• Parties: Jerome R. MIKULSKI; Elzetta C. Mikulski, On Behalf of Themselves and All Others Similarly Situated, Plaintiffs-Appellants, v. CENTERIOR ENERGY CORPORATION; First Energy Corporation; Cleveland Electric Illuminating Company; The Toledo Edison Company, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 666

435 F.3d 666

Jerome R. MIKULSKI; Elzetta C. Mikulski, On Behalf of Themselves and All Others Similarly Situated, Plaintiffs-Appellants, v. CENTERIOR ENERGY CORPORATION; First Energy Corporation; Cleveland Electric Illuminating Company; The Toledo Edison Company, Defendants-Appellees.

No. 03-4486.

United States Court of Appeals, Sixth Circuit.

Argued: February 4, 2005.

Decided and Filed: January 26, 2006.

COPYRIGHT MATERIAL OMITTED

ARGUED:

Eric H. Zagrans, Zagrans Law Firm, Elyria, Ohio, for Appellants. Mitchell G. Blair, Calfee, Halter & Griswold, Cleveland, Ohio, for Appellees.

ON BRIEF:

Eric H. Zagrans, Zagrans Law Firm, Elyria, Ohio, Thomas R. Theado, Gary, Naegele & Theado, LLC, Lorain, Ohio, Eben O. McNair IV, Daniel S. White, Schwarzwald & McNair, Cleveland, Ohio, for Appellants. Mitchell G. Blair, Colleen M. O'Neil, Tracy S. Johnson, Anthony J. LaCerva, Calfee, Halter & Griswold, Cleveland, Ohio, for Appellees.

Before: BATCHELDER and DAUGHTREY, Circuit Judges; O'KELLEY, District Judge.^*

O'KELLEY, D. J., delivered the opinion of the court, in which BATCHELDER, J., joined.

DAUGHTREY, J. (pp. 676-678), delivered a separate opinion concurring in part and dissenting in part.

OPINION

O'KELLEY, District Judge.

This appeal arises from four state court actions against the defendants that were separately removed to the U.S. District Court for the Northern District of Ohio. The four cases were later consolidated to address the defendants' separately-filed motions for judgment on the pleadings after the court denied the separate motions to remand.

I. Factual and Procedural History

On January 22, 2002, plaintiffs Jerome R. Mikulski and Elzetta C. Mikulski filed an action (Mikulski I) against Centerior Energy Corporation ("Centerior") and First Energy Corporation (the successor company to Centerior) in Ohio's Cuyahoga County Court of Common Pleas. The plaintiffs sought to represent a class of individual shareholders in Centerior who claim that they received inaccurate Forms 1099-DIV or equivalent substitutes as information statements¹ from the company in 1986. The Mikulskis sought damages in the amount of what they claim to be overpaid federal and state taxes plus costs and attorneys' fees.

On October 30, 2002, the Court of Common Pleas directed the plaintiffs to clarify their calculation of the alleged error in the shareholder information statements. On November 15, 2002, in response to this order, the plaintiffs served First Energy with a copy of their supplemental response to the interrogatory. In the response, they disclosed that their claims for relief involved whether the defendants violated Section 312(n)(1) of the Internal Revenue Code.² The response stated, in part:

From its formation in 1986, [Centerior] deliberately and fraudulently manipulated its tax accounting practices over a period of years in order to artificially inflate its "earnings and profits" (fn. "A defined term under the Internal Revenue Code...") so that it would look more profitable to its investors. This was vitally important to Centerior in 1986 because it needed to justify the recent merger of CEI and Toledo Edison. In the process, however, Centerior defrauded some 200,000 shareholders who lost more than $35 million from being wrongly instructed by Centerior to pay too much in federal income taxes on their 1986 distributions alone.

Centerior violated the Internal Revenue Code by doing what Section 312(n)(1) of the Code specifically forbids —Centerior illegally included in its earnings and profits calculations for 1986 (and subsequent years) more than $1.5 billion of construction expenses that its subsidiaries had incurred in 1984 and earlier. Code Section 312(n)(1) states that no construction expenses incurred before January 1, 1985 may be considered in calculating a corporation's earnings and profits.

Pls.' Supplemental Resp. to Interrog. No. 1 of Defs.' Second Set of Interrogs. (Emphasis in original).

On December 13, 2002, the defendants removed the case to the United States District Court for the Northern District of Ohio pursuant to 28 U.S.C. § 1441(b). The defendants alleged that the plaintiffs' complaint raised a substantial federal question and that resolution of that question was essential to the resolution of the plaintiffs' claims, based upon the plaintiffs' supplemental response to interrogatories.

The plaintiffs filed three additional state law actions on December 31, 2002. Mikulski II, Mikulski III, and Mikulski IV assert identical theories of liability but implicate different tax years and different operating entities: Centerior Energy, Cleveland Electric, and Toledo Edison, the latter two being separate operating companies that together formed Centerior in 1986. Within thirty days of the service of the complaints in these three subsequent suits, each action was removed to the federal district court by the defendants.

On January 12, 2003, the plaintiffs moved to have the case remanded to the Cuyahoga County Court of Common Pleas, which motion was denied on February 28, 2003. The district court found that the plaintiffs' causes of action, although structured as breach of contract and fraudulent misrepresentation claims, raised a substantial federal question involving federal tax law. The plaintiffs' two subsequent motions for reconsideration were also denied. Additionally, the district court denied the plaintiffs' motions to remand Mikulski II, III, and IV.

On March 19, 2003, the defendants filed a motion for judgment on the pleadings on the grounds that the plaintiffs' actions were preempted under federal law expressly by 26 U.S.C. § 7422 and implicitly by the scope and complexity of the Internal Revenue Code. The matter was referred to Magistrate Judge Patricia A. Hemann for consideration of pretrial motions. Following extensive briefing, the magistrate judge issued a report and recommendation on June 3, 2003, which concluded that judgment on the pleadings should be granted and, to the extent that there were no distinguishing facts in the companion cases, judgment would also be appropriate in these matters. In the report and recommendation, the magistrate judge noted that the plaintiffs could have raised the issue with the Internal Revenue Service, could have filed for a refund, or could have pursued administrative remedies. The magistrate judge also noted that if the court allowed the lawsuit to proceed, it could open the floodgates of litigation in federal court to suits by every shareholder for misstatement of earnings and profits, by every employee for overstatements of earnings on W-2 forms by employers, and by every independent contractor against a payor on an overstated 1099 form under a theory of breach of implied or express contract or fraudulent misrepresentation. The report and recommendation noted that the Internal Revenue Code was enacted to avoid these types of actions and to allow an injured taxpayer to proceed for a refund directly against the government.

After the magistrate judge's report and recommendation in Mikulski I, the defendants moved for judgment on the pleadings in the companion cases. Because this suit and the three others filed by the plaintiffs had factual similarities, the cases were consolidated by the district court for final briefing. The plaintiffs agreed that the report and recommendation could be considered as having been entered in all four cases.

The plaintiffs objected to the report and recommendation on the grounds that it mischaracterized the claim as one for a tax refund and therefore erroneously concluded that the claims are preempted by federal tax laws. The plaintiffs also filed a motion for reconsideration of the order denying remand. The district court held a hearing on September 25, 2003 on the plaintiffs' objections to the report and recommendation. At the hearing, the plaintiffs primarily relied upon the Supreme Court decision in Beneficial National Bank v. Anderson, 539 U.S. 1, 123 S.Ct. 2058, 156 L.Ed.2d 1 (2003), stating that the Supreme Court stressed the need for complete preemption in removal cases. The plaintiffs alleged that there was no complete preemption, just mere presence of a federal statute in an action that seeks relief only under state law, so there was no basis for removal jurisdiction to the federal courts. They stressed that their suit was based on state law claims for breach of contract and fraud and not that the defendants allegedly violated the Internal Revenue Code, which was not relevant. The defendants responded that the magistrate judge and the district court reached the correct result in relying on proper grounds to support removal jurisdiction.

Following oral argument, on October 6, 2003, the district court considered and rejected the plaintiffs' arguments for remand and adopted the magistrate judge's report and recommendation. Judge Donald C. Nugent stated that, construing the complaint in the light most favorable to the plaintiffs and accepting all of the complaint's factual allegations as true, he found the defendants were entitled to judgment on the pleadings. The district court also granted the defendants' motions for judgment on the pleadings in the three companion cases. The plaintiffs then filed this appeal.

II. Standard of Review

This court reviews a district court's decision of whether to dismiss for lack of federal subject matter jurisdiction de novo. Dixon v. Ashcroft, 392 F.3d 212, 216 (6th Cir.2004) (citing Joelson v. United States, 86 F.3d 1413, 1416 (6th Cir.1996)). The factual findings made by the district court in deciding a motion to dismiss, however, are reviewed only for clear error. Dixon, 392 F.3d at 216 (citing Jones v. City of Lakeland, 175 F.3d 410, 413 (6th Cir.1999) (abrogated on other grounds) (quoting Gafford v. Gen. Elec. Co., 997 F.2d 150, 161 (6th Cir.1993))). The court reviews the district court's refusal to remand a case removed from state court de novo. Harper v....